You are here

Financial Aid

Historic Times for Student Aid

Congress poised to make dramatic changes to the student aid system by the fall
University Business, Jun 2009

THE OBAMA ADMINISTRATION is pushing bold changes for the nation’s financial system, and Congress has laid the groundwork to accomplish them. While it seems certain that Congress will change student aid dramatically this year, it is less certain what these changes will be.

President Obama is pushing for the elimination of the Federal Family Education Loan Program (FFELP) to pay for an expansion of the Pell Grant Program and to move it from discretionary spending to mandatory spending.

But powerful members of Congress appear hesitant about aspects of both proposals, sparking consideration of possible alternatives. Senate Budget Committee Chairman Kent Conrad (D-N.D.) is concerned about the costs associated with a new mandatory spending program, and House Appropriations Chairman David Obey (D-Wis.) has reservations about losing the authority to set annual appropriations for Pell, an important spending program under his committee’s jurisdiction. Some lawmakers oppose a federal takeover of student lending and are strong supporters of the FFELP. Many private companies that participate in the FFELP have provided generous campaign contributions to lawmakers.

The higher ed community has expressed cautious support for Obama's student aid proposals.

The higher education community has generally expressed cautious support for Obama’s student aid proposals. Most in higher ed strongly support the changes to Pell but are nervous about the possibility that eliminating the FFELP could have unintended negative consequences for student and parent borrowers. A carefully worded letter to Congress from 24 higher education associations highlights the conflicting sentiments.

“This proposal has sparked controversy and debate because it asks colleges and universities to forgo longstanding lending arrangements that have worked successfully in favor of a system with which some are unfamiliar,” the letter states. “However, although many of our institutions remain wary of this change, they are open to considering it in order to secure an authentic Pell Grant entitlement.”

President Obama was swept into the White House on a groundswell of popularity, which has helped in proposing a bold agenda. Among his many goals is that the United States will have the world’s highest proportion of college graduates by 2020. On February 26, the Obama administration issued its 2010 budget proposal, which called for elimination of the FFELP, making Pell Grants a true entitlement program that increases annually based on the Consumer Price Index, expanding and redesigning the Perkins Loan Program, and consolidating and increasing federal higher education tax benefits.

At a press conference on higher education, Obama noted that the trend has been toward a quality higher education slipping out of reach for ordinary Americans. That “threatens the dream of opportunity that is America’s promise to all its citizens,” he said. “It threatens to widen the gap between the haves and the have-nots. And it threatens to undercut America’s competitiveness. That’s why we have taken and proposed a number of sweeping steps over our first few months in office; steps that amount to the most significant efforts to open the doors of college to middle-class Americans since the GI Bill.”

Despite some disagreement about Obama’s student aid recommendations, Democratic leaders in Congress have laid the foundation to adopt Obama’s recommendations. On April 29, the House and Senate adopted a 2010 fiscal year budget resolution that gives lawmakers the option to use a special legislative procedure, known as reconciliation instructions, to protect student aid reforms from a filibuster in the Senate. Normally, 60 votes are needed to avoid a filibuster in the Senate, but under reconciliation instructions only 51 votes are needed. The instructions also set an Oct. 15 deadline for the House and Senate to pass student aid legislation.

But the reconciliation instructions, like the budget resolution, only provide a broad outline for congressional committees, which then fill in the details. The reconciliation instructions in the 2010 budget resolution direct the House and Senate education committees to create $1 billion in savings. How these savings are created is ultimately up to the committees.

In addition to the reconciliation instructions, several other factors will force changes to the student aid system to ensure it is an effective system in the future.

Changes are needed to ensure that the Pell Grant is relevant in the future. The maximum Pell Grant has remained relatively flat over the past several decades while the cost of everything else, including the cost of college, has increased. The dwindling purchasing power of Pell Grant awards threatens the program’s ability to encourage low-income students to set, pursue, and accomplish higher education goals.

Decisions made by Congress will likely reshape how students and families pay for college.

The Obama administration and Congress recently took steps to prevent the Pell Grant Program from becoming irrelevant by providing significant increases to the maximum Pell Grant as part of the economic stimulus package, but these increases are only for two years. Congress also provided mandatory funds to boost the maximum Pell Grant that are set to expire in 2012. If Pell is not made a true entitlement program, it will face a “funding cliff,” placing extraordinary pressure on the annual appropriations process to prevent cuts to Pell Grant awards.

Similarly, fundamental changes are needed to ensure that the student loan program remains a reliable college financing option in the future. Last year when the credit markets froze, FFELP loan providers’ ability to raise capital for student loans was severely inhibited. Congress passed legislation giving the U.S. Department of Education the authority to purchase loans from FFELP lenders to inject the industry with capital and prevent a disruption in the availability of student loans. However, this legislation will expire on July 1, 2010, and it is unknown if Congress will extend it.

The Education Department is currently preparing the Direct Loan Program to handle 100 percent of student loans in case the Obama administration is able to enact its proposal or FFELP is unable to raise sufficient capital to provide enough loans because the department’s authority to buy loans expires.

The 2010 budget resolution adopted by Congress makes it easier to enact Obama’s student aid proposals, but it does not guarantee that these changes will be adopted. Congress has made it clear that the reconciliation instructions included in the budget resolution will not preclude consideration of alternatives to Obama’s proposals.

The budget resolution includes a “sense of Congress,” showing that in their opinion changes to the loan programs “should include some future role for the currently involved private and nonprofit entities, including state nonprofits with 100 percent [guaranteed lending] in the state.” In addition, the sense of Congress notes that “loan processing, administration, and servicing should continue to be performed, as needed, by for-profit and nonprofit lenders.”

House Budget Committee Chairman John Spratt (D-S.C.) has indicated that the reconciliation instructions would not prevent the House and Senate education committees from moving legislation under traditional procedures.

“But [reconciliation instructions] would provide fallback to ensure that these policy initiatives can move through the Congress if negotiations come to an impasse,” Spratt said.

Congress’ willingness to consider alternatives to abruptly eliminating FFELP has sparked alternative proposals from student aid stakeholders. Financial aid offices are one group that is understandably concerned about the impact of eliminating FFELP. The program currently provides roughly 75 percent of all federal loans, and FFELP participants provide a host of services to students and borrowers, such as financial education and default prevention. The National Association of Student Financial Aid Administrators has proposed an alternative student loan model that would incorporate the best aspects of existing student loan programs and leverage the expertise of current FFELP participants.

“It is obvious that a new student loan model is needed?and needed quickly,” NASFAA President and CEO Philip Day recently wrote in a letter to members. “We must help design a system that works best for borrowers, taxpayers, and institutions. In addition to the importance of providing a workable alternative to the abrupt elimination of FFELP, we must also remember the historic opportunity we have to make the Pell Grant a true entitlement.”

These are truly historic times for the U.S. financial aid system. The decisions made by Congress in the next few months will likely reshape how the federal government helps students and families pay for college in the future. The administration has proposed the most fundamental redesign of federal student aid policy in 35 years, and now Congress is poised to enact sweeping changes. The significance of this moment can’t be understated.

Haley Chitty is director of communications at NASFAA,